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Sunday, June 25, 2017

DINAR IRAQ & DONG VIETNAM UPDATED, 25 JUNE

I n most of the world’s economies reflects the local currency exchange rate of the strength of the national economy and the extent of its involvement in the orbit of world trade imports and exports, as well as the nature and size of the inflows and overseas financial flows from the country.

In the oil countries there is a second story, it is often linked to local currency exchange rate supplier of oil flows. In Iraq, the path of exchange rates disclosed during the past five decades, from that fact Bodh, the Iraqi dinar has witnessed the beginning of the seventies of the last century, when the oil revenues flowing profusely, up to a remarkable touches of $ 3 in exchange for one dinar.

While the dinar exchange rate collapsed after the freezing of Iraq’s oil exports early nineties to reach nearly 3,000 dinars per dollar. But after 2003, and the expansion of oil exports and recovery levels of oil prices returned exchange rates to rise again around 1200 dinars per dollar.

The dominance of oil on the dinar Iraqi economy horribly exposed on the outside to provide the needs of the country’s goods and services due to the weakness of national production to meet the minimum demand of the public on the various types of consumer and investment goods.

This is actually committed the government with its institutions (especially the central bank) to stabilize exchange rates at appropriate levels to secure citizen access to goods and services commensurate with the current income levels.

The Iraqi government gets its revenue from the dollar against the export of huge amounts of oil to world markets, and the oil ministry to transfer these funds to the dollar and the Ministry of Finance account.

Because most government expenditures in Iraqi dinars, the Ministry of Finance resort to replace the oil dollar Iraqi dinar already available at the Central Bank of Iraq, and the consequent entry of the dollar to the central bank in exchange for the dinar out of it.

Last government dollars and Iraqi dinars substituent accumulating foreign exchange reserves in the box. This reserve of foreign currency is used in feed demand business sector (traders and others) and the family sector (public citizens) on the dollar in the exchange market, and the consequent dollar out of the central bank in exchange for the entry of the dinar to him.

Which it has already seen that the Central Bank of Iraq is the only bidder for the dollar, and the specificity of exchange rates in the oil countries. This fact made the exchange rates function of oil prices and production levels, thus increasing exposure to the economy on the global oil markets and volatility.

When increasing crude oil prices and the flow of oil supplier profusely rising levels of central bank reserves of foreign currency, while easing the flow of that resource is shrinking foreign exchange reserves in the country, threatening exchange rates to decline.

The prospects of the dinar in the context of the current oil scene Nibbles decline in oil prices, foreign exchange reserves at the central bank since 2015, because what comes out of the central bank, to cover the domestic demand of the dollar, higher than what the bank enters the oil from the dollar through oil revenues window.

This fact is reflected in the decline in foreign exchange reserves at the central bank for nearly half, from about $ 80 billion in 2014 to about $ 40 billion at the current time. It means the continuous decline of the country’s reserve of foreign currency sliding the Iraqi economy to the sharp part of the crisis.

Because Iraq is suffering at the present time due to the decline of government expenditures, economic recession (which is the engine of growth and economic stability), and if the central bank deficit in the coming months on the financing of the market demand of the dollar, it threatens to lower the value of the dinar.

The fact that inflation in Iraq is linked to exchange rates tightly (because most of the domestic demand is covered import), the deterioration of the value of the dinar will leave immediately sharp inflationary waves make a complex economic challenge (stagflation), threatening the economic and social security in the country to collapse.

In the face of these serious challenges and will result in the speculation on the dinar increase the depth of the crisis fever, it is imperative to economic decision-makers to anticipate the crisis to adopt a number of policies Perhaps the most important:

1. find alternative policies for the auction sale of the currency because of the tainted by suspicions of waste and corruption contributed to the expansion of the size of the gap between the official exchange rate and the parallel exchange (market price) on the one hand, and accelerated in decreasing the size of foreign reserves at the Central Bank on the other.

2. The tax system reform in the country, namely customs taxes to reduce the dreaded exit the dollar by modernizing the customs tax structure of the form that limits the entry of luxury goods and Altfajrah expensive, and contributes to stimulating the national product that Iraq has a comparative advantage.

3. The size of the reserve of foreign currency is directly linked to the government budget deficit, the size of fiscal deficits rise in the past years has contributed significantly to the erosion of central bank reserves. This requires the approach to continue adjusting public expenditures, specifically ongoing, and the adoption of cost of return in public spending approach to achieve the maximum possible benefit. This requires a revolution in the fact that public financial management with the need to focus on the importance of the completion of the final accounts in order to detect deposits of waste and corruption in public expenditure, both current and investment.

4. The adoption of exchange rate policy is creeping if crude oil prices continued to fall to avoid the transition towards a floating exchange rate immediately falls while foreign reserves at the Central Bank without currency levels cover.

5. try to move the economic sectors able to cover part of the external import, agricultural and some sectors such as food industries by providing them with loans and facilities necessary for the promotion of competition and foreign product. Such policy can achieve food security (at least partially) and absorbs part of unemployment on the one hand and reduce the drain of foreign currency abroad on the other.

Dr.. Haidar Hussein Tohme Associate Researcher at the Center for Euphrates Development and Strategic Studies

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